How to use our annual allowance calculator tool

To help you know what information is needed to carry out AA calculations, and how to correctly populate the fields in our calculator.

Our annual allowance calculator

When choosing your input for ‘What tax year did the individual first join a pension?’ you need to understand why we ask this question. We are looking to uncover all unused annual allowances (AA) that can be carried forward to the current tax year. This is relevant where pension input amounts (PIAs) for the current tax year will exceed the standard AA, or member’s individual tapered AA if applies. If this is not the case, then you do not need PIAs any further back than the current tax year and you would only need to use the calculator if the taper applied.

If you are looking to maximise carry forward, you would go back three years (but not beyond the date of first joining a pension scheme) before the current tax year and if there is an AA excess in any of those years, three years before that AA excess year, which may mean going right back to 2008/09, to uncover unused AA for carry forward.

Let’s say your client joined a pension scheme in 2008/09 but their first and only AA excess was in tax year 2018/19. You could select a start date of 2015/16 and key PIAs for this year up to date as the excess in 2018/19 could have used available AA from 2015/16, 2016/17 and 2017/18 as required. If there was any unused AA remaining from 2015/16 (ie not needed to absorb the 2018/19 excess input amount), this can no longer be used as it became over three years old at the end of tax year 2018/19.

Next you are asked for ‘Total inputs for PIPs per tax year’. You need to know the pension input amount (PIA) for the pension input period (PIP) ending in the relevant tax year. Before we talk about PIAs, let’s take a look at pension contributions and the tax relief methods that are used.

Tax relief methods

There are various methods of paying pension contributions to a pension scheme. Each scheme will operate using a specific basis, the member can’t choose which option applies.

Net Pay contributions

This method is used by most occupational, employer-sponsored pension schemes. The contribution is deducted from salary before tax is calculated and the gross amount is paid into the pension scheme. For example, if the client wants to pay £100 per month this amount is deducted from their salary before tax is calculated and paid into the pension. If the client pays 12 monthly contributions of £100 in the current tax year the PIA for this contribution would be £1,200.

Relief at Source (RAS) contributions

This applies to personal and third party contributions on behalf of the member. The contribution is paid net of basic rate tax relief to the scheme and the scheme claims basic rate relief from HMRC, which is then paid directly into the pension. For example, if the client wants to pay £100 gross per month into a personal pension plan the provider will collect £80 per month from their bank account then claim £20 tax relief from HMRC. The gross contribution is £100 per month and 12 contributions in the current tax year would equate to a PIA of £1,200.

Employer contributions

Contributions are paid gross. The PIA is the amount of the contribution for the pension input period.

Salary Sacrifice

This is an agreement between the client and employer. The amount sacrificed will become a gross employer contribution. Therefore the PIA will be accounted for as part of the employer contribution. However, you will need to find out if the employer is also passing on their National Insurance Contribution savings as a result of the reduced salary (it could be none, some or all).

Assessment – claim to HMRC

This applies to gross contributions the client is paying, for example, into Retirement Annuity Contracts (“s226”). They need to claim tax relief, if available, via HMRC. The PIA is the amount of the contribution.

It may be possible to estimate anticipated PIAs for the current tax year for a workplace pension scheme, including salary sacrifice arrangements, from the client’s payslip or P45. If not, the position should be clarified with the employer directly, as they are best placed to help decipher their pay slips or P45s.

Example:

Sam is a member of her workplace pension. Her salary is £40,000. She pays 6% of her salary via Net Pay and her employer pays 12% of salary into the pension. She also pays a RAS contribution to a separate personal pension plan and £150 is debited from her bank account each month.

The total expected PIA for the current tax year (existing inputs field) is £9,450.

This is broken down as follows:

Employee contribution: £40,000 x 6%                                                     = £2,400

Employer contribution: £40,000 x 12%                                                   = £4,800

Relief at Source (RAS) contribution: £150 /0.8 (to gross it up) x 12       = £2,250

See our article covering the interaction of tax relief and annual allowance.

Pension input amounts

To complete the input fields you require details of the client’s Pension Input Amounts (PIAs).

Current Tax Year (existing inputs field)

Money Purchase scheme

The PIA is simply the gross total of all regular and single contributions (personal, third party and employer) paid to date and contributions expected to be paid by the end of the current tax year.

Defined Benefit (DB) scheme

The PIA for a DB scheme is the difference between the capital value of pension and tax-free cash right at the start of the pension input period (the opening value) and the end of the pension input period (the closing value), not the contributions paid by the employee or their employer.

You may be able to obtain an estimate of the PIA for the current tax year from the pension scheme but not all schemes provide this service and some may charge for this service. If they don’t provide an estimate of the PIA they will be able to confirm the opening value. You will then need to estimate the closing value through discussions with the client. For example, using their expected salary and length of service at the end of the pension input period.

Example:

1/60th accrual scheme, assuming CPI of 3%

• 15 years’ service

• £75,000 pensionable earnings; increasing to £78,000

• Inflation 3%

• Expected Money purchase AVC contributions of £4,680

Step 1 – ‘Opening Value’:

(15/60 x £75,000) x 16 = £300,000

Step 2 – Increase ‘opening value’ by inflation:

£300,000 x (1 + 3%) = £309,000

Step 3 – ‘Closing Value’:

(16/60 x £78,000) x 16 = £332,800

Step 4 – DB ‘Pension Input Amount’: Closing Value – Opening Value

£332,800 – £309,000 = £23,800

Step 5 – Add money purchase contributions:

£23,800 + £4,680 = £28,480

Total pension input amount = £28,480

Based on the above example you would input £28,480 into the current tax year existing inputs field.

We have a Defined Benefit PIA tool in the calculator section on PruAdviser which you can use to estimate the PIA.

Current Tax Year (New inputs field)

Include here the proposed new contribution.

Tax years prior to the current year (existing inputs field)

A transaction history for a money purchase scheme will not provide you with all of the information you require as it only details the contributions paid. In addition to this you would also require details of the Pension Input Periods (PIPs) for each scheme.

Prior to 8 July 2015 each pension arrangement would have its own default PIP. The default PIP may not have been in line with the tax year, it can differ from one scheme to another, and it was also possible to alter the PIP. As such, trying to work out PIAs in this way is a manual process which is time consuming and can lead to errors, particularly if the client has been contributing to more than one scheme and PIPs are different in each scheme.

You can read more about the transitional aspects of pension input periods, including the reason for the pre and post alignment periods for the 2015/16 tax year at ‘Carry forward of unused annual allowance for pension savings’.

With regards to a DB scheme you would need to request multiple retirement benefit statements to determine the opening and closing values. PIPs can also be different between DB schemes so again this is a time consuming exercise and can lead to errors.

It is best practice to request a Pension Savings Statement (PSS) from all of the client’s pension schemes. This way you will have confirmation of the PIAs from the scheme and a clear audit trail for your client file. It would be prudent to request a PSS from the client’s scheme(s) on an annual basis. If you require more information about when a scheme must provide a PSS (automatically or on request by the member) please see the next section.

The PSS will confirm the PIA for the pension input periods (PIPs) ending in the most recently completed tax year and also the three previous tax years and must include a pre and post-alignment split for any 2015/16 pension input amounts.

Case study for 2017/18 tax year

For example, if the client has a money purchase and defined benefit scheme and you request a 2017/2018 PSS the scheme will confirm the following information in the statement (format will differ from one scheme to another):

Money Purchase scheme

Defined Benefit (DB) scheme

On receipt of the statements you will simply add together the PIAs for each tax year and input the total PIA for each tax year into the relevant existing inputs field. For example, based on the above figures you would populate the input fields in the AA tool as follows:

Looking at the above statements separately (and assuming the Tapered AA or Money Purchase AA do not apply) the client does not have PIAs in excess of the standard AA for each tax year. However, when the inputs are combined the client does have an AA excess of £5,000 in the 2016/2017 tax year. This did not cause an AA excess charge because there is sufficient unused AA available to carry forward from the 2014/2015 and 2015/2016 tax years.

However, this excess may have been absorbed by unused AA available from the 2013/2014 tax year. As such, to understand what unused AA is available to use in the 2018/2019 tax year for the client in this example you would need to find out the PIAs for both schemes for the 2013/2014 tax year and input the results into 2013/2014 field in the AA tool.

Remember, you should go back three years (or to date of first joining any pension scheme if within the previous 3 years) from any annual allowance excess year, which may mean going right back to 2008/09, to uncover unused annual allowance for carry forward.

Pension savings statement

What is a Pension Savings Statement (PSS)?

Pension schemes must automatically provide members with a Pension Savings Statement if the pension input amounts received by their scheme exceed the annual allowance. If the member has more than one pot under the same scheme the statement must cover all of their pots in that scheme. If the member has flexibly accessed their pension savings the scheme must provide a money purchase pension savings statement if the inputs exceed the money purchase annual allowance (MPAA). The scheme must provide the relevant statement by 6 October following the end of the tax year.

Not receiving a statement does not mean the member has not exceeded their annual allowance or the MPAA, it just means they haven’t exceeded the allowance in any one individual scheme. You still need to assess the total pension input amounts for all schemes to determine whether or not the client has an annual allowance or MPAA excess.

Please note that if the total PIA under one scheme in the 2015/2016 tax year was more than £80,000, or their PIA under the scheme for the 2015/2016 post-alignment tax year was more than £40,000 then the scheme should have already sent the client a PSS for that particular scheme. A 2015/2016 PSS will also provide PIAs for the 2012/2013, 2013/2014 and 2014/2015 tax years.

The client can also request a Pension Savings Statement. The scheme administrator has until the later of:

• Three months following the date of receipt of the request for information, and

• 6 October following the end of the relevant tax year.

There will be circumstances when the scheme requires information from another person, such as the employer, in which case the scheme will have three months from receipt of the information to send the statement.

Tapered annual allowance

On 6 April 2016 the government introduced the Tapered Annual Allowance for individuals with “threshold income” of over £110,000 AND "adjusted income" of over £150,000. You can read full details in our Tapered annual allowance and Planning ideas and potential pitfalls articles. As of 6 April 2020 the limits for threshold and adjusted income were increased to £200,000 and £240,000 respectively. From 6 April 2023 the adjusted income limit was increased to £260,000.

Threshold income

"Threshold Income" is broadly defined as ‘the individual’s net income for the year,  this will include all taxable income such as, dividend income, pensions income, interest on savings, rental income etc, less the amount of any taxable lump sum death benefits paid to the individual during the tax year that can be deducted from the threshold income.’

Where an individual has a "Threshold income" of £200,000 (£110,000 for tax years 2016/17 to 2019/20)  or less they cannot be subject to the tapered annual allowance and there is no requirement to calculate adjusted income. If the threshold income is exceeded  you must calculate adjusted income to work out the amount of any tapered annual allowance.

Adjusted income

Not to be confused with the term ‘adjusted net income’, which is used for aspects of tax rules. The term ‘adjusted income’ relates solely to the tapered annual allowance rules.

The ‘adjusted income’ definition adds in all employer pension contributions, to prevent individuals from avoiding the restriction by exchanging salary for employer contributions. For those in defined benefit or cash balance arrangements, the value of the employer contribution will be calculated using the annual allowance methodology. That is the employer contribution will be the pension input amount for the arrangement, less the amount of any contributions made by the individual during the tax year.

Where both the adjusted income and threshold income have been breached then the rate of reduction in the annual allowance is by £1 for every £2 that the adjusted income limit is  exceeded, but not below a minimum tapered annual allowance.For the tax years 2016/17 to 2019/20 the minimum tapered annual allowance was £10,000. It was reduced to £4,000 for tax years 2020/21 to 2022/23 then increased to £10,000from 6 April 2023.

Threshold income and adjusted income calculation inputs

When using our calculator you need to complete all relevant fields. Don’t worry about entries being double-counted, the calculator will correctly add on or subtract your inputs to reach final figures.  Here is a summary of what entries are added and subtracted (or ignored) to reach the results.

Remember both limits must be breached for a TAA to apply. Also remember that when looking at the tax years 2016/17 to 2019/20 the limits for threshold and adjusted income were £110,000 and £150,000 respectively.

Total Income

This field is required for Threshold Income and Adjusted Income calculations.

Total income is income subject to income tax and includes the following:

Salary, bonus, pension income (including state pension), taxable element of redundancy payments, taxable social security payments, trading profits, income from property, dividend income, onshore and offshore bond gains, taxable payment from a Purchased Life Annuity, interest from savings accounts held with banks, building societies, NS&I and Credit Unions, interest distributions from authorised unit trusts and open-ended investment companies, profit on government or company bonds which are issued at a discount or repayable at a premium and income from certain alternative finance arrangements.

Important notes:

Salary

It is the gross amount subject to tax (the personal allowance cannot be deducted). If the client pays pension contributions via Net Pay or Salary Sacrifice the amount subject to tax is the amount net of the pension contribution (for Net Pay contributions) or the gross salary after deducting the amount sacrificed.

For example, if the client’s gross salary is £120,000 but they pay a pension contribution of 5% via Net Pay or Salary Sacrifice the salary subject to tax will be £114,000.

If you are unsure about your client’s expected salary, bonus, salary sacrifice arrangements or occupational pension input amounts please seek clarification from the client’s employer.

If the client is self-employed it will be necessary to discuss the expected level of profit for the current tax year with the client and their accountant.

If the client is a director of a company then it will be necessary to discuss the expected level of salary, dividends and existing company pension contributions with the client and their accountant.

If you are unsure how to decipher client payslips, P45s or company accounts, the figures will need to be confirmed by the clients employer or accountant.

Redundancy Payments

If the client receives a redundancy payment the first £30,000 is tax free and as such doesn’t count for total income. For example, if the client receives a redundancy payment of £120,000 the amount subject to tax is £90,000.

Onshore and offshore bond gains

It is the full bond gain that is included (not the top-sliced gain).

Dividend income

It is the gross dividend amount received (not just the amount above the £500 dividend zero rate of taxation, commonly called the dividend allowance).

Savings Income

This is the gross amount.

Allowable Reliefs

This field is required for Threshold and Adjusted Income calculations.

These are the allowable reliefs under the income tax act of 2007. This includes such things as early trade losses relief, share loss relief and terminal trade loss relief. There are many other reliefs within this part of the legislation and it is likely those eligible for these reliefs will have had them brought to their attention by their accountant. Therefore if you are unsure about whether any of these reliefs should be included please discuss this with the client and their accountant.

Examples of what is not included here include:

• Gift Aid.

• Personal allowance.

• The first £30,000 of a redundancy payment.

• Top-slicing relief in relation to life assurance investment bond gains.

Net Pay contributions

This field is required for Adjusted Income calculations only.

This includes personal contributions paid via Net Pay to occupational pension schemes (including defined benefit schemes). It also includes contributions to Retirement Annuity contracts (“s226”), contributions gaining UK tax relief but made to overseas pension schemes, using excess relief under net pay provisions and using relief on making a claim provisions.

For example, if the client Vera contributes £400 per month via Net Pay this contribution is deducted from her salary before tax is calculated. If the client pays 12 monthly Net Pay contributions of £400 then you would add £4,800 into this field.

This is a different method to Relief at Source contributions which is explained in the following section.

Relief at Source contributions

This field is required for Threshold Income calculations only.

This is the expected total gross contributions paid by the client (or a third party contribution on their behalf) to a personal pension scheme operating Relief at Source (RAS). A RAS contribution is where the client’s contribution is paid net of basic rate tax relief to the scheme and the scheme claims basic rate relief from HMRC, which is then paid directly into the pension.

For example, if the client pays a personal contribution to a scheme which operates the RAS method the client would send the pension provider a cheque for £8,000. The scheme would claim £2,000 basic rate relief from HMRC and pay it into the pension. The amount you would include in the TAA tool for this RAS contribution would be £10,000.

Employer Pension Contributions to Money Purchase

This field is required for Adjusted Income calculations only.

This is simply the total contribution paid by the employer. Please note this includes all employer contributions paid as part of any salary sacrifice agreement, that is regardless if the arrangement started before or after 9 July 2015.

Total DB Pension Input Amount for the year

This field is required for Adjusted Income calculations only.

This is the Pension Input Amount that you have estimated for the year, as previously covered in the PIA section. It is not the monetary amount of actual contributions by the employee or employer.

Total gross employee contribution to DB scheme(s) included above

This field is required for Adjusted Income calculations only.

This is the level of contribution paid into the DB scheme by the employee only. This needs to be included here to avoid double counting if the client is paying their contribution via Net Pay as you have already added the contribution by the client in the Net Pay input field.

For example, if the client pays 5% of their £120,000 salary via Net Pay into their DB scheme and you estimate the Pension Input Amount to be £32,000, you will have used the figure of £114,000 to represent salary in the Total Income input field. A short method to add all employee and employer pension contributions would seem to be to add the full defined benefit pension input amount giving Adjusted income of £146,000 (£114k + £32K).

However, although it eventually reaches the same result, the correct calculation method is a bit more long-winded. Starting with total income of £114,000, you then put £6,000 in the Net Pay contributions field (which is added on, running total £120k). The total DB pension input amount field figure would be £32,000 and you would input £6,000 into this field (which means it’s deducted from the total PIA, as you already added member’s net pay contribution at the earlier step, so the balance of £26k is added). Adjusted income should work out as £146,000.

Employment Income given up post 9/7/2015

This field is required for Threshold Income calculations only.

This is any salary sacrifice for pension contributions set up, or amended, on or after 9 July 2015. Pre-existing arrangements are not included here. Salary sacrifice arrangements are a contractual agreement between the employee and their employer. If the client has an agreement in place prior to 9 July 2015 you should check whether this agreement also relates to any annual bonus payments. Even though a client may have been sacrificing some or all of their annual bonus each year it may not be part of the pre-existing arrangement. If it’s not part of the arrangement it would need to be added here.

Example for the 17/18 tax year

Neil’s gross reference salary is £115,000 and agreed to sacrifice 6% of his salary each year when he started with the company prior to 9 July 2015. This arrangement does not relate to bonus payments.

If Neil was to receive a bonus payment of £3,000 but sacrifices it for a pension contribution you would still use the figure of £108,100 in the Total Income field on the TAA tool in respect of salary from the employer but you would need to enter £3,000 into this field on the TAA tool. The resulting impact is that Threshold Income would equate to £111,100. So effectively a sacrifice post 9 July 2015 makes no difference to the threshold income, as if Neil had taken the £3,000 as a bonus his threshold income would be £111,100 also as Threshold Income is above £110,000 (the limit that applied for the 17/18 tax year) you will need to carry out the Adjusted Income calculation (remembering that the £3,000 sacrificed will increase the employer contributions).

Seek clarification from the employer if the client is unsure about the salary sacrifice arrangement.

Taxable Lump Sum Death Benefits (Gross Value)

This field is required for Threshold and Adjusted Income calculations.

This is mainly if you receive a lump sum from a deceased pension member’s fund when they were over 75 (although this can be under 75 in some circumstances such as payment of death benefit from uncrystallised funds more than two years after the scheme were aware of the members death).

Example

Stella has earned income of £60,000. Her father died over age 75 with a pension pot of £80,000 and Stella was the sole beneficiary. The £80,000 was paid to her as a taxable lump sum. Therefore when completing the Total Income input field of the TAA tool you would input £140,000 (£60,000 + £80,000) as taxable income but you would also input £80,000 into this input field.

Calculator output

As you’ll know, there is no claim process to use carry forward of unused annual allowance, however, the client must keep a record for HMRC audits. Our calculator output could help with this. 

If you want to keep a copy of your workings, you can use the ‘view and print reports’ option. You can choose the parts of the report you want from the following;

• A record of your keyed inputs,

• Tapered annual allowance calculations where these apply to your client,

• A summary of annual allowance used for every year, showing if carry forward was used,

• Existing inputs – contributions made or expected to be made

• New inputs – proposed contribution amounts

This means you don’t need to print the full, around 14 pages, report every time. If your computer settings allow you can save as a pdf rather than printing.